Who Will Win the Amazing LNG Race?

The competition is on to export natural gas to high-priced Asian markets. Let's take a look at who could end up winning the gold.

Natural gas is a hot investment these days. The boom created by hydraulic fracturing has opened up a number of economic opportunities and driven prices to lows not seen in a decade. With gas now trading under $2 per million British thermal units, investors are eyeing a number of gas plays once thought unlikely to pan out. Those keen on natural-gas fueling have looked toward Westport Innovations, maker of natural-gas engines, and Clean Energy Natural Fuels, builder of natural-gas fueling stations and "America's Natural Gas Highway." Others see equipment providers and drilling contractors as a way to profit from the boom. But perhaps the greatest potential unleashed by the shale rush is in the export market.

Unlike oil, natural gas must be compressed or liquefied in order for it to be shipped, so market prices are regional and vary widely around the world. What sells for less than $2 in North America goes for more than $9 in Europe and near $16 in Asia, and as the law of supply and demand would dictate, there are a number of companies angling to get in on this arbitrage opportunity. The race is on to see who can be the first to profit from the asymmetry.

In lane one, from the good ol' U.S.A.Perhaps the best-known of the bunch, Cheniere Energy(AMEX: LNG) is aiming to be the first company to export gas from American soil in over 40 years. The project took a major step forward earlier this week when it received approval from the Federal Energy Regulatory Commission to build additions to its Sabine Pass terminal in Louisiana and convert it from importing gas to exporting it. Even better for Cheniere, the FERC has said it won't approve any other export projects until late summer when it finishes studying the impact of exports on prices. Some have advocated keeping the huge supplies of gas in the U.S. to provide cheap electricity and fuel, among other strategic reasons. The plant will export 16 million metric tonnes per year, or MMtpa, of natural gas -- about 3% of current U.S. supply -- a majority of which has already been contracted out to buyers in Europe, India, and South Korea. Cheniere hopes to begin exporting the commodity as soon as 2015.

In lane two, hailing from north of the borderOf course, the shale boom didn't just stop at the 49th parallel. There are several Canadian companies aiming to enter the export race, and two projects planned for Kitimat, British Columbia are awaiting final decisions to be made by the end of the year. One of the projects, a joint venture between Apache, EnCana(NYSE: ECA), and EOG Resources known as Kitimat LNG, is being delayed as the group looks for more investors. The first phase of the facility is expected to ship 5 MMtpa of gas, though that number could easily rise.

Energy giant Royal Dutch Shell(NYSE: RDS-A) has also tossed its hat into the Kitimat ring. Along with partners including Korea Gas, China National Petroleum, and Mitsubishi, the energy producer is planning a terminal capable of exporting 13 MMtpa of gas.

Cheniere would appear to have an advantage over the Canadian producers, as it only has to convert an import terminal for exports, unlike its Canadian counterparts, who would need to build one from scratch. The research firm Wood Mackenzie recently reported in a study that U.S. politics and regulation could hinder that advantage, however, as exports could be restricted. The desire to keep reserves in the U.S. and the delay in further approvals from the FERC seem unwise, because Canadian exports would likely have the same effect on U.S. prices as American exports -- but without the benefits to U.S. companies. The Energy Information Administration has said it's aiming for between 31 MMtpa and 94 MMtpa of exports, though Wood Mackenzie thinks that range could be optimistic. Analysts predict the demand for new liquefied natural gas in the Asia-Pacific market to be 80 MMtpa by 2022.

In lane three: the thunder from down underFinally, gas producers across the Pacific aren't shying away from the LNG arbitrage, either. Currently, 70 percent of the world's LNG projects under construction are in Australia, which is on pace to pass Qatar as the world's largest LNG exporter by the end of the decade. Many analysts consider the North American shale boom a threat to Australian exports, which totaled 18.9 million tons last year, but companies including Shell, ExxonMobil(NYSE: XOM), and Woodside Petroleum are leading projects that would add an additional 61 million tons of LNG by the end of the decade.

Not far away, Exxon is also heading up an export project in Papua New Guinea that should handle 6.3 MMtpa of gas and begin shipping gas by late 2013 or early 2014. Interoil(NYSE: IOC) is planning to ship up to 9 MMtpa of gas from the tropical nation. That project has been slow to develop, however, and the Papua New Guinean government recently ordered the company to find a larger partner to help extract its resources.

A photo finishEnergy markets are notoriously volatile, and much could change before many of these projects, which won't be ready for at least a few years, come online. To see how quickly markets turn around, investors need only be reminded that just six years ago, U.S. natural-gas prices were at an all-time high of $15.32 per MMbtu before the shale boom caused the market to crash.

Energy demand from emerging markets should continue to grow quickly, but increased exports could bring price levels up. The development of renewable energy could also present competition for the enormous gas reserves, and the environmental effects of fracking still do not appear to be fully understood.

Overall, however, trends look promising. Demand from Japan and South Korea, the world's two biggest importers of LNG, rose by about 10% last year, and prices went up considerably as well. Cheniere estimates that at Henry hub (i.e., North American market) prices of $4 per MMbtu, it will cost $9.90 MMbtu to deliver gas from its terminal in Louisiana to Asia. With the price gap between the two continents now about $14 per MMbtu, that should be an easy bet, so long as conditions stay roughly the same. Cheniere just needs to make sure it beats the competition to the finish line.

One more for the roadNatural gas isn't the only energy source in flux these days. Crude-oil prices have climbed back over $100 a barrel, and with rising demand from emerging markets and the recovery here at home, prices shouldn't dip anytime soon. This all means good news for energy service suppliers, and our experts at the Fool have found one such provider overlooked by most. It has a fortress-like balance sheet, operates in six continents, and is estimated to have a 60% share of the rig equipment market. Find out the name of this hot investment and why it's "The Only Energy Stock You'll Ever Need" in our new special free report. You can get your free copy by clicking right here.

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